Private Mortgage Insurance

I only put down 10% on my investment property.  Generally, when you put down less than 20% on a property (LTV of 80%), you either need to purchase Private Mortgage Insurance (PMI) or you need to take out a second loan.  For investment properties, you might need an LTV of 75% or less.  I don’t know the exact rules, and they have probably changed or will change due to the financial crisis.  Also PMI does not cover your payments if you can no longer afford them.  It insures the bank against your failure to pay, so you will probably never deal with your PMI company.

My loan originator mentioned that it would be better if put down at least 20%, but based on the numbers (and my lack of money really), I decided I would be better off paying a little extra for PMI.  I could have gotten a second mortgage, but I didn’t want to have to deal with a second lender and all the associated paperwork.  However, my loan originator failed to mention two important things.  The first was that the percentage paid for the PMI is not locked like your rate is locked.  I, naturally, assumed both numbers would not change, but I found out the hard way, at settlement, that the PMI had increased by at least .2%.  Of course it went up; would you expect it to go any other way?  The other thing I was not told was that you can’t get rid of PMI.  You have to pay it until the loan is paid off.  I believe my loan originator was probably unaware of this.  My settlement attorney said something about it.  He too, apparently, did not know the law in this particular case.

The Homeowner’s Protection Act lets you cancel PMI once your LTV drops below a certain level.  I’ll let you read it yourself; I’m not very familiar with it since it has never applied to me.  As I later learned, it only applies when the house is your primary residence.  If you’re an investor, you pretty much get thrown to the wolves.

My specific plan, which I learned about at settlement, required me to pay .9%  a year on the original value of the loan for the first 10 years.  It then dropped to .2% for the last 20 years.  Let’s think for a moment about just how bad a deal this is.  In a healthy real estate market, you might expect the equity in your house to increase to more than 20% of its value within less than 5 years (assuming an initial LTV of 90%).  With PMI, you would be stuck paying thousands in insurance to protect against a default that has no more chance of occurring than someone who initially made a 20% down payment.  In fact, even as the risk of default drops to zero, you will still be paying insurance.  There’s a simple phrase for that: free money (for them, not you).  Even if you did default, the bank would more than recoup any losses.  Additionally, since the interest rate pertains to the original value of the loan, if the loan is held for the full 30 years, there will likely come a point in time at which the monthly PMI payments are greater than the interest on the loan itself.

The bottom line is this: Don’t get PMI. Had I paid PMI for the full term of my loan, I would have paid more in PMI than the additional 10% down needed to get rid of it.  Take out a second loan instead; you can always pay it off later.  If you absolutely have to get PMI, make sure you find out all the details up front and that your rate can’t change at settlement.

Category: Banks Behaving Badly, Overcharging Comment »


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